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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
  
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16577
 
 
 
(Exact name of registrant as specified in its charter).
 
 
Michigan
  
38-3150651
(State or other jurisdiction of
  
(I.R.S. Employer
Incorporation or organization)
  
Identification No.)
 
 
5151 Corporate Drive, Troy, Michigan
  
48098-2639
(Address of principal executive offices)
  
(Zip code)
(248) 312-2000
(Registrant’s telephone number, including area code)
 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.     Yes  ý    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
o  (Do not check if smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  ý.
As of April 25, 2013, 56,039,487 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.


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FORWARD – LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in a forward-looking statement. Examples of forward-looking statements include statements regarding our expectations, beliefs, plans, goals, objectives and future financial or other performance. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. Except to fulfill our obligations under the U.S. securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include:

(1)
Volatile interest rates that impact, amongst other things, (i) the mortgage business, (ii) our ability to originate loans and sell assets at a profit, (iii) prepayment speeds and (iv) our cost of funds, could adversely affect earnings and our ability to pay dividends to stockholders;

(2)
Competitive factors for mortgage loan originations could negatively impact gain on loan sale margins;

(3)
Competition from banking and non-banking companies for deposits and loans can affect our earnings, gain on sale margins and market share;

(4)
Changes in the regulation of financial services companies and government-sponsored housing enterprises, and in particular, declines in the liquidity of the residential mortgage loan secondary market, could adversely affect our business;

(5)
Changes in regulatory capital requirements or an inability to achieve or maintain desired capital ratios could adversely affect our earnings opportunities and our ability to originate certain types of loans, as well as our ability to sell certain types of assets for fair market value;

(6)
General business and economic conditions, including unemployment rates, movements in interest rates, the slope of the yield curve, any increase in mortgage fraud and other related criminal activity and the further decline of asset values in certain geographic markets, may significantly affect our business activities, loan losses, reserves, earnings and business prospects;

(7)
Repurchases and indemnity demands by mortgage loan purchasers, guarantors and insurers, uncertainty related to foreclosure procedures, and the outcome of current and future legal or regulatory proceedings, including our litigation with Assured Guaranty Municipal Corp. and MBIA Insurance Corporation, could result in unforeseen consequences and adversely affect our business activities and earnings;

(8)
The Dodd-Frank Wall Street Reform and Consumer Protection Act has resulted in the elimination of the Office of Thrift Supervision (the "OTS"), tightening of capital standards, and the creation of a new Consumer Financial Protection Bureau and has resulted, or will result, in new laws and regulations, such as the emerging mortgage servicing standards, that are expected to increase our costs of operations. In addition, the change to the Board of Governors of the Federal Reserve System (the "Federal Reserve") as our primary federal regulator and to the Office of the Comptroller of the Currency (the "OCC") as the primary federal regulator of Flagstar Bank, FSB and its subsidiary (collectively, the "Bank") may result in interpretations that differ from those of the OTS in a manner that adversely affects our operations;

(9)
Both the volume and the nature of consumer actions and other forms of litigation against financial institutions have increased, and to the extent that such actions are brought against us, the cost of defending such suits as well as potential exposure could increase our costs of operations;

(10)
Our compliance with the terms and conditions of the agreement with the U.S. Department of Justice, the impact of performance and enforcement of commitments under, and provisions contained in the agreement, and our accuracy and ability to estimate the financial impact of that agreement, including the fair value of the future payments required, could accelerate our related litigation settlement expenses;


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(11)
Our, or the Bank's, failure to comply with the terms and conditions of the Supervisory Agreement with the Federal Reserve or the Consent Order with the OCC, respectively, could result in further enforcement actions against us, which could negatively affect our results of operations and financial condition; and

(12)
The downgrade of the long-term credit rating of the U.S. by one or more ratings agencies could materially affect global and domestic financial markets and economic conditions, which may affect our business activities, financial condition, and liquidity.

All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such factor on our business.

Please also refer to Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and Item 1A to Part II of this Quarterly Report on Form 10-Q, which are incorporated by reference herein, for further information on these and other factors affecting us.

Although we believe that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies and other factors. Accordingly, we cannot give you any assurance that our expectations will in fact occur or that actual results will not differ materially from those expressed or implied by such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.




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FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013
TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.  
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements of the Company are as follows:
Consolidated Statements of Financial ConditionMarch 31, 2013 (unaudited) and December 31, 2012
Consolidated Statements of Operations – For the three months ended March 31, 2013 and 2012 (unaudited)
Consolidated Statements of Comprehensive Income (Loss) – For the three months ended March 31, 2013 and 2012 (unaudited)
Consolidated Statements of Stockholders’ Equity – For the three months ended March 31, 2013 and 2012 (unaudited)
Consolidated Statements of Cash Flows – For the three months ended March 31, 2013 and 2012 (unaudited)
Notes to the Consolidated Financial Statements (unaudited)
        Note 1 - Nature of Business
        Note 2 - Basis of Presentation and Accounting Policies
        Note 3 - Fair Value Accounting
        Note 4 - Investment Securities
        Note 5 - Loans Held-for-Sale
        Note 6 - Loans Repurchased With Government Guarantees
        Note 7 - Loans Held-for-Investment
        Note 8 - Pledged Assets
        Note 9 - Private-Label Securitization Activity
        Note 10 - Mortgage Servicing Rights
        Note 11 - Derivative Financial Instruments
        Note 12 - FHLB Advances
        Note 13 - Long-Term Debt
        Note 14 - Representation and Warranty Reserve
        Note 15 - Warrant Liabilities
        Note 16 - Stockholders' Equity
        Note 17 - Earnings (Loss) Per Share
        Note 18 - Compensation Plans
        Note 19 - Income Taxes
        Note 20 - Legal Proceedings, Contingencies and Commitments
        Note 21 - Segment Information
        
        




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Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 
March 31,
2013
 
December 31,
2012
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash items
$
50,840

 
$
38,070

Interest-earning deposits
2,179,846

 
914,723

Cash and cash equivalents
2,230,686

 
952,793

Securities classified as trading
170,139

 
170,086

Securities classified as available-for-sale
169,827

 
184,445

Loans held-for-sale (including $2,510,669 and $2,865,696 at fair value at March 31, 2013 and December 31, 2012, respectively)
2,677,239

 
3,939,720

Loans repurchased with government guarantees
1,604,906

 
1,841,342

Loans held-for-investment (including $18,393 and $20,219 at fair value at March 31, 2013 and December 31, 2012, respectively)
4,743,266

 
5,438,101

Less: allowance for loan losses
(290,000
)
 
(305,000
)
Loans held-for-investment, net
4,453,266

 
5,133,101

Total interest-earning assets
11,255,223

 
12,183,417

Accrued interest receivable
81,056

 
91,992

Repossessed assets, net
114,356

 
120,732

Federal Home Loan Bank stock
301,737

 
301,737

Premises and equipment, net
223,276

 
219,059

Mortgage servicing rights at fair value
727,207

 
710,791

Other assets
340,455

 
416,214

Total assets
$
13,094,150

 
$
14,082,012

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
7,847,291

 
$
8,294,295

Federal Home Loan Bank advances
2,900,000

 
3,180,000

Long-term debt
247,435

 
247,435

Total interest-bearing liabilities
10,994,726

 
11,721,730

Accrued interest payable
15,402

 
13,420

Representation and warranty reserve
185,000

 
193,000

Other liabilities (including $19,100 at fair value at both March 31, 2013 and December 31, 2012)
714,994

 
994,500

Total liabilities
11,910,122

 
12,922,650

Commitments and contingencies – Note 20

 

Stockholders’ Equity
 
 
 
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 266,657 issued and outstanding at March 31, 2013 and December 31, 2012, respectively
261,828

 
260,390

Common stock $0.01 par value, 70,000,000 shares authorized; 56,033,204 and 55,863,053 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively
561

 
559

Additional paid in capital
1,476,624

 
1,476,569

Accumulated other comprehensive loss
(656
)
 
(1,658
)
Accumulated deficit
(554,329
)
 
(576,498
)
Total stockholders’ equity
1,184,028

 
1,159,362

Total liabilities and stockholders’ equity
$
13,094,150

 
$
14,082,012

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
 
For the Three Months Ended
March 31,
 
2013
 
2012
 
(Unaudited)
Interest Income
 
 
 
Loans
$
91,950

 
$
113,908

Securities classified as available-for-sale or trading
2,094

 
8,571

Interest-earning deposits and other
946

 
412

Total interest income
94,990

 
122,891

Interest Expense
 
 
 
Deposits
13,508

 
18,986

FHLB advances
24,161

 
27,394

Other
1,652

 
1,778

Total interest expense
39,321

 
48,158

Net interest income
55,669

 
74,733

Provision for loan losses
20,415

 
114,673

Net interest income (expense) after provision for loan losses
35,254

 
(39,940
)
Non-Interest Income
 
 
 
Loan fees and charges
33,360

 
29,973

Deposit fees and charges
5,146

 
4,923

Loan administration
20,356

 
38,885

Gain (loss) on trading securities
51

 
(5,971
)
Loss on transferors’ interest
(174
)
 
(409
)
Net gain on loan sales
137,540

 
204,853

Net loss on sales of mortgage servicing rights
(4,219
)
 
(2,317
)
Net gain on securities available-for-sale (includes zero and $310 accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale securities)

 
310

Net gain on sale of assets
958

 
27

Total other-than-temporary impairment gain

 
3,872

Loss recognized in other comprehensive income before taxes

 
(5,047
)
Net impairment losses recognized in earnings

 
(1,175
)
Representation and warranty reserve – change in estimate
(17,395
)
 
(60,538
)
Other fees and charges, net
9,320

 
12,816

Total non-interest income
184,943

 
221,377


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Flagstar Bancorp, Inc.
Consolidated Statements of Operations, Continued
(In thousands, except per share data)
 
For the Three Months Ended
March 31,
 
2013
 
2012
 
(Unaudited)
Non-Interest Expense
 
 
 
Compensation and benefits
77,208

 
65,989

Commissions
17,462

 
15,466

Occupancy and equipment
19,375

 
16,950

Asset resolution
16,445

 
36,770

Federal insurance premiums
11,240

 
12,324

Other taxes
897

 
946

Warrant (income) expense
(3,500
)
 
2,549

Loan processing expense
17,111

 
10,686

Legal and professional expense
28,839

 
16,817

General and administrative
11,513

 
10,249

Total non-interest expense
196,590

 
188,746

Income (loss) before federal income taxes
23,607

 
(7,309
)
Provision for federal income taxes

 

Net Income (Loss)
23,607

 
(7,309
)
Preferred stock dividend/accretion (1)
(1,438
)
 
(1,407
)
Net income (loss) applicable to common stock
$
22,169

 
$
(8,716
)
Income (loss) per share
 
 
 
Basic (2)
$
0.33

 
$
(0.22
)
Diluted (2)
$
0.33

 
$
(0.22
)
(1)
The preferred stock dividend/accretion represents only the accretion. On January 27, 2012, the Company elected to defer payment of dividends and interest on the preferred stock.
(2)
Restated for a one-for-ten reverse stock split announced September 27, 2012 and began trading on October 11, 2012.
The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)

 
For the Three Months Ended
March 31,
 
2013
 
2012
 
(Unaudited)
Net income (loss)
$
23,607

 
$
(7,309
)
Other comprehensive income (loss), before tax
 
 
 
Securities available-for-sale
 
 
 
Change in net unrealized loss on sale of securities available-for-sale
1,002

 
13,121

Reclassification of gain on sale of securities available-for-sale

 
(310
)
Additions for the amount related to the credit loss for which an OTTI impairment was not previously recognized

 
1,175

Total securities available-for-sale, before tax
1,002

 
13,986

Other comprehensive income, net of tax
1,002

 
13,986

 
 
 
 
Comprehensive income
$
24,609

 
$
6,677

The accompanying notes are an integral part of these Consolidated Financial Statements.


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Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated
Deficit)
 
Total
Stockholders’
Equity
Balance at December 31, 2011
$
254,732

 
$
556

 
$
1,471,463

 
$
(7,819
)
 
$
(639,216
)
 
$
1,079,716

(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(7,309
)
 
(7,309
)
Total other comprehensive income

 

 

 
13,986

 

 
13,986

Accretion of preferred stock
1,407

 

 

 

 
(1,407
)
 

Stock-based compensation (1)

 
1

 
1,027

 

 

 
1,028

Balance at March 31, 2012
$
256,139

 
$
557

 
$
1,472,490

 
$
6,167

 
$
(647,932
)
 
$
1,087,421

Balance at December 31, 2012
$
260,390

 
$
559

 
$
1,476,569

 
$
(1,658
)
 
$
(576,498
)
 
$
1,159,362

(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
23,607

 
23,607

Total other comprehensive income

 

 

 
1,002

 

 
1,002

Restricted stock issued

 
1

 
(1
)
 

 

 

Accretion of preferred stock (2)
1,438

 

 

 

 
(1,438
)
 

Stock-based compensation

 
1

 
56

 

 

 
57

Balance at March 31, 2013
$
261,828

 
$
561

 
$
1,476,624

 
$
(656
)
 
$
(554,329
)
 
$
1,184,028

(1)
Restated for a one-for-ten reverse stock split announced September 27, 2012 and began trading on October 11, 2012.
(2)
The preferred stock dividend/accretion represents only the accretion. On January 27, 2012, the Company elected to defer payment of dividends and interest on the preferred stock.
The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
 
For the Three Months Ended
March 31,
 
2013
 
2012
 
(Unaudited)
Operating Activities
 
 
 
Net income (loss)
$
23,607

 
$
(7,309
)
Reconciliation of net income (loss) to net cash used in operating activities
 
 
 
Provision for loan losses
20,415

 
114,673

Depreciation and amortization
5,404

 
4,469

Loss on fair value of mortgage servicing rights
15,641

 
6,927

Stock-based compensation expense
57

 
1,028

Net (gain) loss on the sale of assets
(7,034
)
 
670

Net gain on loan sales
(137,540
)
 
(204,853
)
Net loss on sales of mortgage servicing rights
4,219

 
2,317

Net gain on securities classified as available-for-sale

 
(310
)
Other than temporary impairment losses on securities classified as available-for-sale

 
1,175

Net (gain) loss on trading securities
(51
)
 
5,971

Net loss on transferors' interest
174

 
409

Proceeds from sales of loans held-for-sale
13,850,730

 
11,474,194

Origination and repurchase of mortgage loans held-for-sale, net of principal repayments
(12,623,530
)
 
(11,881,504
)
Decrease (increase) in repurchase of mortgage loans with government guarantees, net of claims received
236,436

 
(103,732
)
Decrease (increase) in accrued interest receivable
10,936

 
(2,943
)
Decrease in other assets
76,049

 
122,214

Increase in accrued interest payable
1,982

 
1,401

Decrease liability for checks issued
(377
)
 
(988
)
Increase in payable for mortgage repurchase option
(13,966
)
 
(30,683
)
Representation and warranty reserve-change in estimate
17,395

 
60,538

Net charge-offs in representation and warranty reserve
(31,213
)
 
(43,589
)
Decrease in other liabilities
(34,258
)
 
(20,073
)
Net cash provided by (used in) operating activities
1,415,076

 
(499,998
)
Investing Activities
 
 
 
Proceeds from the sale of investment securities available-for-sale

 
20,665

Net repayment of investment securities available-for-sale
15,378

 
25,405

Net change from sales of loans held-for-investment
61,645

 
(187,768
)
Principal repayments net of origination of portfolio loans
635,929

 
208,523

Proceeds from the disposition of repossessed assets
27,285

 
25,035

Acquisitions of premises and equipment, net of proceeds
(9,379
)
 
(7,150
)
Proceeds from the sale of mortgage servicing rights
89,928

 
16,394

Net cash provided by investing activities
820,786

 
101,104


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Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows, continued
(In thousands)
 
For the Three Months Ended
March 31,
 
2013
 
2012
 
(Unaudited)
Financing Activities
 
 
 
Net (decrease) increase in deposit accounts
(447,004
)
 
909,165

Net decrease in Federal Home Loan Bank advances
(280,000
)
 
(362,000
)
Net disbursement of payments of loans serviced for others
(234,846
)
 
(126,288
)
Net receipt of escrow payments
3,881

 
4,907

Net cash (used in) provided by financing activities
(957,969
)
 
425,784

Net increase in cash and cash equivalents
1,277,893

 
26,890

Beginning cash and cash equivalents
952,793

 
731,058

Ending cash and cash equivalents
$
2,230,686

 
$
757,948

Supplemental disclosure of cash flow information
 
 
 
Loans held-for-investment transferred to repossessed assets
$
50,247

 
$
171,375

Total interest payments made on deposits and other borrowings
$
37,339

 
$
46,756

Federal income taxes paid
$
5,300

 
$
225

Reclassification of loans originated for portfolio to loans held-for-sale
$
1,129

 
$
200,908

Reclassification of mortgage loans originated held-for-sale then transferred to portfolio loans
$
62,774

 
$
13,140

Mortgage servicing rights resulting from sale or securitization of loans
$
126,494

 
$
111,484

 
 
 
 

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Flagstar Bancorp, Inc.
Notes to the Consolidated Financial Statements (Unaudited)

Note 1 – Nature of Business

Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), the holding company for Flagstar Bank, FSB (the "Bank") is a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. At March 31, 2013, our total assets were $13.1 billion. The Company is the largest bank headquartered in Michigan and one of the top 10 largest savings banks in the United States.

The Company offers a range of products and services to consumers, businesses, and homeowners. As of March 31, 2013, the Company operated 111 banking centers in Michigan and 41 home loan centers in 19 states. The Company originates loans nationwide and is among the top ten leading originators of residential first mortgage loans in the United States. The Company also offers consumer products including deposit accounts, standard and jumbo home loans, home equity lines of credit ("HELOC"), and personal loans, including auto and boat loans. The Company also offers commercial loans and treasury management services. Commercial products include deposit and sweep accounts, telephone banking, term loans and lines of credit, lease financing, government banking products and treasury management services such as remote deposit and merchant services.

The Company sells or securitizes most of the residential mortgage loans that it originates and generally retains the right to service the mortgage loans that it sells. These mortgage servicing rights ("MSRs") are occasionally sold by the Company in transactions separate from the sale of the underlying mortgages. The Company has, from time to time, retained certain loan originations in the held-for-investment portfolio, although the Company has sold substantially all of its originations for the past several years.

The Bank is subject to regulation, examination and supervision by the Office of the Comptroller of the Currency ("OCC") of the U.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation ("FDIC") and the Consumer Financial Protection Bureau (the "CFPB"). The Bank's deposits are insured by the FDIC through the Deposit Insurance Fund ("DIF"). The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve ("Federal Reserve"). The Bank is also a member of the Federal Home Loan Bank ("FHLB") of Indianapolis.

Troubled Asset Relief Program

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (initially introduced as the Troubled Asset Relief Program ("TARP")) was enacted, and the U.S. Treasury injected capital into U.S. financial institutions under the TARP Capital Purchase Program. On January 30, 2009, the Company entered into a letter agreement including the securities purchase agreement with the U.S. Treasury pursuant to which, among other things, the Company sold to the U.S. Treasury preferred stock and a warrant. The preferred stock accrues cumulative dividends quarterly at a rate of 5 percent per annum until January 30, 2014, and 9 percent per annum thereafter. As long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including the Company's common stock, par value $0.01 per share (the "Common Stock"), are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

On January 27, 2012, the Company exercised its contractual right to defer regularly scheduled quarterly payments of dividends, beginning with the February 2012 payment, on preferred stock issued and outstanding in connection with participation in the TARP Capital Purchase Program. These payments will be periodically evaluated and reinstated when appropriate, subject to the provisions of the Company's supervisory agreement, dated January 27, 2010, with the Federal Reserve, as a successor regulator to the OTS (the "Supervisory Agreement"). Under the terms of the preferred stock, the Company may defer payments of dividends for up to six quarters in total without default or penalty.

On December 18, 2012, the U.S. Treasury announced its intention to auction the Company's preferred stock issued and outstanding under the TARP Capital Purchase Program during 2013. On March 15, 2013, the U.S. Treasury announced that it had priced auctions for the preferred stock of several institutions, including the Company, which it had purchased in early 2009 through the TARP Capital Purchase Program. The auction closed on March 28, 2013. The Company's preferred stock is now held by unrelated third party investors and is no longer held by the federal government under the TARP Capital Purchase Program. The U.S. Treasury remains the holder of a warrant to purchase shares of Common Stock.


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Commercial Loan Sales
    
Effective December 31, 2012, the Bank entered into a definitive Transaction Purchase and Sale Agreement (the "CIT Agreement") with CIT Bank, the wholly-owned U.S. commercial bank subsidiary of CIT Group Inc. ("CIT"). Under the terms of the CIT Agreement, CIT acquired $1.3 billion in commercial loan commitments, $784.3 million of which was outstanding at December 31, 2012. The loans sold consist primarily of asset-based loans, equipment leases and commercial real estate loans. The sale resulted in a reversal of $12.6 million in loan loss reserves associated with such loans and which the reversal was recognized at December 31, 2012. The total purchase price for the portfolio was $779.2 million. During the three months ended March 31, 2013, the Company sold $710.5 million of these commercial loans to CIT, and we expect the remaining loans to close in early April 2013.

Effective February 5, 2013, the Bank entered into a definitive Asset and Portfolio Purchase and Sale Agreement (the "Customers Agreement") with Customers Bank ("Customers") located in Wyomissing, Pennsylvania. Under the terms of the Customers Agreement, Customers acquired $187.6 million in commercial loan commitments, $150.9 million of which were outstanding at December 31, 2012. The loans sold consist primarily of commercial and industrial loans. The transaction settled on March 28, 2013 for $148.5 million.

Pending and Threatened Litigations

On February 5, 2013, the U.S. District Court for the Southern District of New York (the "Court") issued a decision in the lawsuit filed by Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("Assured"). The Court issued a decision in favor of Assured on its claims for breach of contract against the Bank in the amount of $89.2 million plus contractual interest and attorneys' fees and costs. On April 1, 2013, the court issued a final judgment against the Company for a total of $106.5 million, consisting of $90.7 million in damages plus $15.9 million in pre-judgment interest. The Bank filed a notice of appeal later that month. The Court subsequently issued a memorandum order, in which the Court reserved the decision regarding attorneys' fees until after the appeal.

In May 2010, the Bank received repurchase demands from MBIA Insurance Corporation with respect to closed-end, fixed and adjustable second mortgage loans that were sold by the Bank in connection with its two non-agency second mortgage loan securitizations. On January 11, 2013, MBIA filed a complaint against the Bank in the U.S. District Court for the Southern District of New York, alleging a breach of various loan level representations and warranties and seeking relief for breach of contract, as well as full indemnification and reimbursement of amounts that it has paid and will pay under the respective insurance policies, plus interest and costs. In the litigation, MBIA alleges damages to date of $165.0 million and unspecified future damages. In March 2013, the Bank filed a motion to dismiss, and MBIA filed a motion for partial summary judgment on the basis of collateral estoppel. The parties are scheduled to complete a briefing and make oral arguments on these motions in May 2013.

Following the Court's decision in the Assured case, the Company increased the accrual for pending and threatened litigation. The total amount accrued for pending and threatened litigation, including amounts paid in anticipation of future settlements, was approximately $247.9 million at March 31, 2013 and $188.5 million of the accrual was recorded during the fourth quarter 2012. Included in this reserve are amounts for the Court's decision regarding Assured and for the lawsuit that the MBIA Insurance Corporation filed against the Bank on January 11, 2013, along with other pending litigation. The litigation accrual is recorded in "legal and professional expense" on the Consolidated Statement of Operations and in "other liabilities" on the Consolidated Statements of Financial Condition. For further information, see Note 20 - Legal Proceedings, Contingencies, and Commitments.

Reverse Stock Split

The Company's board of directors authorized a one-for-ten reverse stock split on September 24, 2012 following the annual meeting of stockholders at which the reverse stock split was approved by its stockholders. The reverse stock split began trading on a post-split basis on October 11, 2012. Unless noted otherwise, all share-related amounts herein reflect the one-for-ten reverse stock split.

In connection with the reverse stock split, stockholders received one new share of Common Stock for every ten shares held at the effective time. The reverse stock split reduced the number of shares of outstanding Common Stock from approximately 558.3 million to 55.8 million. The number of authorized shares of Common Stock was reduced from 700 million to 70 million. Proportional adjustments were made to the Company’s outstanding options, warrants and other securities entitling their holders to purchase or receive shares of Common Stock. In lieu of fractional shares, stockholders received cash payments for fractional shares that were determined on the basis of the Common Stock's closing price on October 9, 2012, adjusted for the reverse stock split. The reverse stock split did not negatively affect any of the rights that accrue to holders of the Company's outstanding options,

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warrants and other securities entitling their holders to purchase or receive shares of Common Stock, except to adjust the number of shares relating thereto accordingly. For further information, see Note 16 - Stockholders' Equity and Note 17 - Earnings (Loss) Per Share.

Management Change
    
On October 1, 2012, the boards of directors of the Company and the Bank appointed Michael J. Tierney as the President, effective immediately, and as the Chief Executive Officer and a director of the Company and the Bank, effective November 1, 2012, in each case subject to receipt of non-objection from the Federal Reserve, the Company's primary regulator, and the OCC, the Bank's primary regulator. Mr. Tierney also was appointed to the boards of directors of the Company and the Bank, subject to receipt of Federal Reserve and OCC non-objections. The Company has received non-objection from the Federal Reserve for Mr. Tierney to serve as President and Chief Executive Officer and a member of board of directors of the Company, and the Bank has received OCC approval for Mr. Tierney to serve on an interim basis as the Bank's President and Chief Executive Officer but OCC non-objection for Mr. Tierney to serve as a member of the Company's board of directors is pending. The Company also announced that John D. Lewis, Managing Director of Donnelly Penman & Partners and former Vice Chairman of Comerica Bank, was appointed to serve as Non-Executive Chairman of the board of directors of the Company and the Bank, in each case subject to receipt of regulatory non-objection. The Company and the Bank received non-objection from the Federal Reserve and the OCC.

Effective December 18, 2012, the Company and the Bank's boards of directors appointed Alessandro DiNello as the President of the Bank and as the Company and the Bank's Chief Administrative Officer, subject to receipt of Federal Reserve and OCC non-objection. The Bank has received non-objection from the OCC for Mr. DiNello to serve as President and Chief Administrative Officer of the Bank, and the non-objection from the Federal Reserve is pending. In addition, the Bank's boards of directors appointed Matthew A. Kerin as the President of the Bank's Mortgage Banking Division, subject to receipt of OCC non-objection. The Bank has received OCC non-objection for Mr. Kerin to serve as President of the Bank's Mortgage Banking Division.

Consent Order
Effective October 23, 2012, the Bank's board of directors executed a Stipulation and Consent (the "Stipulation"), accepting the issuance of a Consent Order (the "Consent Order") by the OCC. The Consent Order replaces the supervisory agreement entered into between the Bank and the Office of Thrift Supervision (the "OTS") on January 27, 2010. The Company is still subject to the Supervisory Agreement with the Federal Reserve. The OCC terminated the supervisory agreement simultaneous with issuance of the Consent Order.
Under the Consent Order, the Bank is required to adopt or review and revise various plans, policies and procedures related to, among other things, regulatory capital, enterprise risk management and liquidity. Specifically, under the terms of the Consent Order, the Bank's board of directors has agreed to, among other things, take the following actions:
Review, revise, and forward to the OCC a written capital plan for the Bank covering at least a three-year period and establishing projections for the Bank's overall risk profile, earnings performance, growth expectations, balance sheet mix, off-balance sheet activities, liability and funding structure, capital and liquidity adequacy, as well as a contingency capital funding process and plan that identifies alternative capital sources should the primary sources not be available;
Adopt and forward to the OCC a comprehensive written liquidity risk management policy that systematically requires the Bank to reduce liquidity risk; and
Develop, adopt, and forward to the OCC a written enterprise risk management program that is designed to ensure that the Bank effectively identifies, monitors, and controls its enterprise-wide risks, including by developing risk limits for each line of business.

Each of the plans, policies and procedures referenced above in the Consent Order, as well as any subsequent amendments or changes thereto, must be submitted to the OCC for a determination that the OCC has no supervisory objection to them. Upon receiving a determination of no supervisory objection from the OCC, the Bank must implement and adhere to the respective plan, policy or procedure. The foregoing summary of the Consent Order does not purport to be a complete description of all of the terms of the Consent Order, and is qualified in its entirety by reference to the copy of the Consent Order filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on October 24, 2012.

The Bank intends to address the banking issues identified by the OCC in the manner required for compliance by the OCC. There can be no assurance that the OCC will not provide substantive comments on the capital plan or other submissions that the Bank makes pursuant to the Consent Order that will have a material impact on the Company. The Company believes that the actions taken, or to be taken, to address the banking issues set forth in the Consent Order should, over time, improve its enterprise

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risk management practices and risk profile. For further information regarding the risks related to the Consent Order, please also refer to the section captioned "Forward-Looking Statements" above and the risk factors previously disclosed in Item 1A to Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Supervisory Agreement

The Company is subject to a supervisory agreement, dated January 27, 2010, with the Federal Reserve, as a successor regulator to the OTS (the "Supervisory Agreement"). The Supervisory Agreement will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve, and the failure to comply with the Supervisory Agreement could result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and could result in additional enforcement actions against the Company. The Company has taken actions which it believes are appropriate to comply with, and intends to maintain compliance with, all of the requirements of the Supervisory Agreement.

Pursuant to the Supervisory Agreement, the Company submitted a capital plan to the OTS, predecessor in interest to the Federal Reserve. In addition, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions; purchase, repurchase or redeem certain securities; incur, issue, renew, roll over or increase any debt and enter into certain affiliate transactions; and comply with restrictions on the payment of severance and indemnification payments, director and management changes and employment contracts and compensation arrangements. The foregoing summary of the Supervisory Agreement does not purport to be a complete description of all of the terms of the Supervisory Agreement, and is qualified in its entirety by reference to the copy of the Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28, 2010. For further information regarding the risks related to the Consent Order, please also refer to the section captioned "Forward-Looking Statements" above and the risk factors previously disclosed in Item 1A to Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Note 2 – Basis of Presentation and Accounting Policies

The unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements. The accompanying interim financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. In addition, certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts and share counts have been adjusted to reflect the one-for-ten reverse stock split that began trading on a post-split basis October 11, 2012 following receipt of stockholder approval at the Company's annual meeting of stockholders. For further information, reference should be made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which are available on the Company’s Investor Relations web page, at www.flagstar.com, and on the SEC website, at www.sec.gov.

Recently Adopted Accounting Standards

On January 1, 2013, the Company adopted the update to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 220, "Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," and applied the provisions retrospectively. Under the amended guidance, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. However, only the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of the guidance did not have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.

On January 1, 2013, the Company adopted the update to FASB ASC Topic 210, "Balance Sheet: Disclosures about Offsetting Assets and Liabilities," and applied the provisions retrospectively. Under the amended guidance, an entity is required to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. The guidance applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting

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arrangement or similar agreement. The adoption of the guidance did not have a material impact on the Company's Consolidated Financial Statements or the Notes thereto. See Note 11 - Derivative Financial Instruments.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company's Consolidated Financial Statements or the Notes thereto or results of operations upon adoption.

In February 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This guidance is effective retrospectively, for annual and interim periods, beginning after December 15, 2013. The adoption of the guidance is not expected to have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.

Regulatory Developments

Among the recent legislative and regulatory developments affecting the banking industry are evolving regulatory capital standards for banking organizations. These evolving standards include the so-called "Basel III" initiatives that are part of the effort by international banking supervisors to improve the ability of the banking sector to absorb shocks in periods of financial and economic stress and changes by the federal banking agencies to reduce the use of credit ratings in the rules governing regulatory capital.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as "Basel III." Basel III, when implemented by the U.S. bank regulatory agencies and fully phased-in, will require U.S. banks to maintain substantially more capital, with a greater emphasis on common equity.

In June 2012, the U.S. bank regulatory agencies requested comment on three sets of proposed rules that implement the Basel III capital framework and also make other changes to U.S. regulatory capital standards for banking institutions. The Basel III proposed rules include heightened capital requirements for banking institutions in terms of both higher quality capital and higher regulatory capital ratios. These proposed rules, among other things, would revise the capital levels at which a banking institution would be subject to the prompt corrective action framework (including the establishment of a new Tier 1 common capital requirement), eliminate or reduce the ability of certain types of capital instruments to count as regulatory capital, eliminate the Tier 1 treatment of trust preferred securities (as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")) following a phase-in period beginning in 2013, and require new deductions from capital for investments in unconsolidated financial institutions, mortgage servicing assets and deferred tax assets that exceed specified thresholds. The proposed rules also would establish a new capital conservation buffer and, for large or internationally active banks, a supplemental leverage capital requirement that would take into account certain off-balance sheet exposures and a countercyclical capital buffer that would initially be set at zero. Once fully phased in, the Basel III capital rules will significantly reduce the allowable amount of the fair value of MSRs included in Tier 1 capital. While the proposed Basel III rules would have become effective under a phase-in period that was to have begun January 1, 2013 and to be in full effect on January 1, 2019, the U.S. bank regulatory agencies announced on November 9, 2012 that the implementations of the proposed Basel III rules would be delayed. No date or time period for implementation has subsequently been announced.

In addition, proposed rules issued by the U.S. banking regulators in June 2012 would also revise the manner in which a banking institution determines risk-weighted assets for risk-based capital purposes under the Basel II framework applicable to large or internationally active banks (referred to as the advanced approach) and under the Basel I framework applicable to all banking institutions (referred to as the standardized approach). These rules would replace references to credit ratings with alternative methodologies for assessing creditworthiness. In addition, among other things, the advanced approach proposal would implement the changes to counterparty credit risk weightings included in the Basel III capital framework, and the standardized approach would modify the risk weighting framework for residential mortgage assets. The standardized approach changes to the Basel I risk-weighting rules are proposed to become effective no later than July 1, 2015.


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In June 2012, the U.S. banking regulators also adopted final market risk capital rules to implement the enhancements to the market risk framework adopted by the Basel Committee (commonly referred to as "Basel II.5"). The final rules are effective January 1, 2013 and, among other things, establish new stressed Value at Risk ("VaR") and incremental risk charges for covered trading positions and replace references to credit ratings in the market risk rules with alternative methodologies for assessing credit risk.

The regulations ultimately applicable to us may be substantially different from the Basel III framework as published in December 2010 and the rules proposed by the U.S. bank regulatory agencies in June 2012. Until such regulations, as well as any other capital regulations under the Dodd-Frank Act, are adopted, the Company cannot be certain that such regulations will apply to the Company or of the impact such regulations will have on the Company's capital ratios. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely affect the Company's results of operations and financial condition.

Note 3 – Fair Value Accounting

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at the measurement date. The Company utilizes fair value measurements to record certain assets and liabilities at fair value and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves, credit spreads or unobservable inputs. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, the Company's future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

Valuation Hierarchy

U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements that is based on the transparency of the inputs used in the valuation process. The three levels of the hierarchy, highest ranking to lowest, are as follows.

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate as of the measurement date;

Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

Level 3 - Unobservable inputs that reflect the Company's own assumptions about the expectations that market participants would use in pricing an asset or liability.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
    
The following is a description of the valuation methodologies used by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets

Securities classified as trading. These securities are comprised of U.S. government sponsored agency securities, U.S. Treasury bonds and non-investment grade residual securities that arose from private-label securitizations of the Company. The U.S. government sponsored agency securities and U.S. Treasury bonds trade in an active, open market with readily observable prices and are therefore classified within the Level 1 valuation hierarchy. The non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Under Level 3, the fair value of residual securities is determined by discounting estimated net future cash flows using expected prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities collateral, considering such factors as loss experience, delinquencies, loan-to-value ratios, borrower credit scores and property type. At March 31, 2013 and December 31, 2012, the Company had no Level 3 securities classified as

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trading. See Note 9 - Private Label Securitization Activity, herein, for the key assumptions used in the residual interest valuation process.

Securities classified as available-for-sale. These securities are comprised of U.S. government sponsored agencies and non-agency collateralized mortgage obligations ("CMOs") and municipal obligations.

U.S. government sponsored agencies are classified within Level 1 of the valuation hierarchy due to the quoted prices for these securities being available in an active market.
The quoted market prices are not available for municipal obligations and the fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and those securities are classified within Level 2 of the valuation hierarchy.
Non-agency CMOs are classified within Level 2 of the valuation hierarchy and were previously classified within Level 3. Non-agency CMOs were transferred from Level 3 to Level 2 during the first quarter 2012 due to increased market liquidity and an increase in the number of available pricing models. The non-agency CMOs are valued based on pricing provided by external pricing services. Previously, the markets were illiquid and fair values were based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement, which was the reason for a Level 3 classification. As of September 30, 2012, the Company sold the remaining securities in non-agency collateralized mortgage obligation securities that were related to the investments arising out of strategies to fully utilize available balance sheet leverage capacity.
The Company determined the fair value of the mortgage securitization, Flagstar Second Mortgage 2006-1 ("FSTAR 2006-1") securitization trust, using a discounted estimated net future cash flow model and therefore classified it within the Level 3 valuation hierarchy as the model utilizes significant inputs which are unobservable.
 
Loans held-for-sale. The Company generally estimates the fair value of loans held-for-sale based on quoted market prices for securities backed by similar types of loans. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair value of loans was computed by discounting cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral. These measurements are classified as Level 2.

Loans held-for-investment. Loans held-for-investment are generally recorded at amortized cost. The Company does not record these loans at fair value on a recurring basis. However, from time to time, a loan becomes impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan is identified as impaired, the fair value of the impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. The fair value of the underlying collateral is determined, where possible, using market prices derived from appraisals or broker price opinions which are considered to be Level 3. Fair value may also be measured using the present value of expected cash flows discounted at the loan's effective interest rate. The Company records the impaired loan as a non-recurring Level 3 valuation.

Loans held-for-investment on a recurring basis are loans that were previously recorded as loans held-for-sale but subsequently transferred to the held-for-investment category. As the Company selected the fair value option for the held-for-sale loans, they continue to be reported at fair value and measured consistent with the Level 2 methodology for loans held-for-sale.

Included in loans held-for-investment is the transferors' interest on the HELOC securitizations. The Company fair value of the transferors' interest is based on the claims due to the note insurer and continuing credit losses on the loans underlying the securitizations, which are considered to be Level 3. See Note 9 - Private-Label Securitization Activity, for the key assumptions used in the transferors' interest valuation process.

Repossessed assets. Loans on which the underlying collateral has been repossessed are adjusted to fair value less costs to sell upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value, less anticipated marketing and selling costs. Fair value is generally based upon third-party appraisals or internal estimates and considered a Level 3 classification.

MSRs. Although there are MSR sales transacting, the current market for residential MSRs is not sufficiently liquid to provide participants with quoted market prices for all tranches of MSRs. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds and discount rates. Management obtains third-party valuations of the residential MSR portfolio on a quarterly basis from independent valuation experts to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level

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3 of the valuation hierarchy. See Note 10 - Mortgage Servicing Rights, for the key assumptions used in the residential MSR valuation process.

Derivative financial instruments. Certain classes of derivative contracts are listed on an exchange and are actively traded, and they are therefore classified within Level 1 of the valuation hierarchy. These include U.S. Treasury futures and U.S. Treasury options. The Company's forward loan sale commitments and interest rate swaps are valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy. Rate lock commitments are valued using internal models with significant unobservable market parameters and therefore are classified within Level 3 of the valuation hierarchy. The Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. The derivatives are reported in either "other assets" or "other liabilities" on the Consolidated Statements of Financial Condition.

Liabilities

Warrants. Warrant liabilities are valued using a binomial lattice model and are classified within Level 2 of the valuation hierarchy. Significant observable inputs include expected volatility, a risk free rate and an expected life. Warrant liabilities are reported in "other liabilities" on the Consolidated Statements of Financial Condition.

DOJ litigation settlement. On February 24, 2012, the Company announced that the Bank had entered into an agreement (the "DOJ Agreement") with the U.S. Department of Justice ("DOJ") relating to certain underwriting practices associated with loans insured by the Federal Housing Administration ("FHA") of the Department of Housing and Urban Development ("HUD"). The Bank and the DOJ entered into the DOJ Agreement pursuant to which the Bank agreed to comply with all applicable HUD and FHA rules related to the continued participation in the direct endorsement lender program, make an initial payment of $15.0 million within 30 business days of the effective date of the DOJ Agreement (paid on April 3, 2012), make payments of approximately $118.0 million contingent upon the occurrence of certain future events (the "Additional Payments"), and complete a monitoring period by an independent third party chosen by the Bank and approved by HUD.

The Company has elected the fair value option to account for the liability representing the obligation to make Additional Payments under the DOJ Agreement. The signed settlement contract with the DOJ establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. The Company made the fair value election as of December 31, 2011, the date the Company first recognized the financial instrument in its financial statements.

At March 31, 2013, the cash flows are discounted using a 14.0 percent discount rate that is inclusive of the risk free rate based on the expected duration of the liability and an adjustment for non-performance risk that represents the Company's credit risk. The model assumes 12 quarters of profitability prior to reversing the valuation allowance associated with the deferred tax asset.

The liability is classified within Level 3 of the valuation hierarchy given the projections of earnings and growth rate assumptions are unobservable inputs. The litigation settlement is included in other liabilities on the Consolidated Financial Statements and changes in the fair value of the litigation settlement will be recorded each quarter in general and administrative expense within non-interest expense on the Consolidated Statements of Operations.


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Assets and liabilities measured at fair value on a recurring basis

The following tables present the financial instruments carried at fair value as of March 31, 2013 and December 31, 2012, by caption on the Consolidated Statement of Financial Condition and by the valuation hierarchy (as described above).

 
Level 1
 
Level 2
 
Level 3
 
Total  Fair
Value
March 31, 2013
(Dollars in thousands)
Securities classified as trading
 
 
 
 
 
 
 
U.S. Treasury bonds
$
170,139

 
$

 
$

 
$
170,139

Securities classified as available-for-sale
 
 
 
 
 
 
 
Mortgage securitization

 

 
87,356

 
87,356

U.S. government sponsored agencies
71,489

 

 

 
71,489

       Municipal obligations

 
10,982

 

 
10,982

Loans held-for-sale
 
 
 
 
 
 
 
Residential first mortgage loans

 
2,510,669

 

 
2,510,669

Loans held-for-investment
 
 
 
 
 
 
 
Residential first mortgage loans

 
18,393

 

 
18,393

Transferors' interest

 

 
6,872

 
6,872

Mortgage servicing rights

 

 
727,207

 
727,207

Derivative assets
 
 
 
 
 
 
 
U.S. Treasury futures
7,998

 

 

 
7,998

Agency forwards
2,845

 

 

 
2,845

Rate lock commitments

 

 
51,389

 
51,389

Interest rate swaps

 
1,853

 

 
1,853

Total derivative assets
10,843

 
1,853

 
51,389

 
64,085

Total assets at fair value
$
252,471

 
$
2,541,897

 
$
872,824

 
$
3,667,192

Derivative liabilities
 
 
 
 
 
 
 
Forward agency and loan sales
$

 
$
(18,876
)
 
$

 
$
(18,876
)
Interest rate swaps

 
(1,853
)
 

 
(1,853
)
Total derivative liabilities

 
(20,729
)
 

 
(20,729
)
Warrant liabilities

 
(7,847
)
 

 
(7,847
)
DOJ litigation settlement

 

 
(19,100
)
 
(19,100
)
Total liabilities at fair value
$

 
$
(28,576
)
 
$
(19,100
)
 
$
(47,676
)
 
 
 
 
 
 
 
 

20

Table of Contents

  
Level 1
 
Level 2
 
Level 3
 
Total  Fair
Value
December 31, 2012
(Dollars in thousands)
Securities classified as trading
 
 
 
 
 
 
 
U.S. Treasury bonds
$
170,086

 
$

 
$

 
$
170,086

Securities classified as available-for-sale
 
 
 
 
 
 
 
Mortgage securitization

 

 
91,117

 
91,117

U.S. government sponsored agencies
79,717

 

 

 
79,717

Municipal obligations

 
13,611

 

 
13,611

Loans held-for-sale
 
 
 
 
 
 
 
Residential first mortgage loans

 
2,865,696

 

 
2,865,696

Loans held-for-investment
 
 
 
 
 
 
 
Residential first mortgage loans

 
20,219

 

 
20,219

Transferors' interest

 

 
7,103

 
7,103

Mortgage servicing rights

 

 
710,791

 
710,791

Derivative assets
 
 
 
 
 
 
 
U.S. Treasury futures
2,203

 

 

 
2,203

Rate lock commitments

 

 
86,200

 
86,200

Agency forwards
3,618

 

 

 
3,618

Interest rate swaps

 
5,813

 

 
5,813

Total derivative assets
5,821

 
5,813

 
86,200

 
97,834

Total assets at fair value
$
255,624

 
$
2,905,339

 
$
895,211

 
$
4,056,174

Derivative liabilities
 
 
 
 
 
 
 
Forward agency and loan sales
$

 
$
(14,021
)
 
$

 
$
(14,021
)
Interest rate swaps

 
(5,813
)
 

 
(5,813
)
Total derivative liabilities

 
(19,834
)
 

 
(19,834
)
Warrant liabilities

 
(11,346
)
 

 
(11,346
)
DOJ litigation settlement

 

 
(19,100
)
 
(19,100
)
Total liabilities at fair value
$

 
$
(31,180
)
 
$
(19,100
)
 
$
(50,280
)

A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Also, the Company manages the risk associated with the observable components of Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company's risk management activities related to such Level 3 instruments. If the market for an instrument becomes more liquid or active and pricing models become available which allow for readily observable inputs, the Company will transfer the instruments from Level 3 to Level 2 valuation hierarchy. Non-agency CMOs were transferred from Level 3 to Level 2 during the first quarter 2012 due to increased market liquidity and an increase in the number of available pricing models. The non-agency CMOs are valued based on pricing provided by external pricing services. The Company had no transfers of recurring assets or liabilities recorded at fair value for the three months ended March 31, 2013.


21

Table of Contents

Fair value measurements using significant unobservable inputs

The tables below include a roll forward of the Consolidated Statement of Financial Condition amounts for the three months ended March 31, 2013 and 2012 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy. 
 
 
Recorded in Earnings
Recorded in OCI
 
 
 
 
 
 
For the Three Months Ended March 31, 2013
Balance at
Beginning of
Period
Total Unrealized Gains / (Losses)
Total Realized Gains / (Losses)
Total Unrealized Gains / (Losses)
Purchases
Sales
Settlements
Transfers In (Out)
Balance at
End of 
Period
Unrealized Gains / (Losses) Held at End of Period (4)
Assets
(Dollars in thousands)
Securities classified as available-for-sale (1)(2)
 
 
 
 
 
 
 
 
 
 
Mortgage securitization
$
91,117

$

$

$
1,227

$

$

$
(4,988
)
$

$
87,356

$

Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
Transferors' interest
7,103

(174
)




(57
)

6,872

(174
)
Mortgage servicing rights
710,791

(15,641
)


126,494

(94,437
)


727,207

17,540

Derivative financial instruments
 
 
 
 
 
 
 
 
 
 
Rate lock commitments
86,200

(30,828
)


139,514

(118,815
)
(24,682
)

51,389

3,230

          Totals
$
895,211

$
(46,643
)
$

$
1,227

$
266,008

$
(213,252
)
$
(29,727
)
$

$
872,824

$
20,596

Liabilities
 
 
 
 
 
 
 
 
 
 
DOJ litigation settlement
$
(19,100
)
$

$

$

$

$

$

$

$
(19,100
)
$

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
Securities classified as available-for-sale (1)(2)(3)
 
 
 
 
 
 
 
 
 
 
Non-agency CMOs
$
254,928

$
(1,175
)
$
310

$
16,504

$

$
(24,104
)
$
(11,327
)
$

$
235,136

$

Mortgage securitization
110,328



685



(5,979
)

105,034


Loans held-for-investment
 
 
 
 
 
 
 
 
 
 
Transferors' interest
9,594

(409
)




(200
)

8,985

(409
)
Mortgage servicing rights
510,475

(6,927
)


111,484

(18,202
)


596,830

17,493

Derivative financial instruments
 
 
 
 
 
 
 
 
 
 
Rate lock commitments
70,965

48,338



171,149

(159,168
)
(63,036
)

68,248

(1,364
)
Totals
$
956,290

$
39,827

$
310

$
17,189

$
282,633

$
(201,474
)
$
(80,542
)
$

$
1,014,233

$
15,720

Liabilities
 
 
 
 
 
 
 
 
 
 
DOJ litigation settlement
$
(18,300
)
$

$
(800
)
$

$

$

$

$

$
(19,100
)
$

 
 
 
 
 
 
 
 
 
 
 
(1)
Realized gains (losses), including unrealized losses deemed other-than-temporary and related to credit issues, are reported in non-interest income.
(2)
U.S. government agency securities classified as available-for-sale are valued predominantly using quoted broker/dealer prices with adjustments to reflect for any assumptions a willing market participant would include in its valuation. Non-agency CMOs classified as available-for-sale are valued using internal valuation models and pricing information from third parties.
(3)
Management had anticipated that the non-agency CMOs would be classified under Level 2 of the valuation hierarchy. However, due to illiquidity in the markets, the fair value of these securities has been determined using internal models and therefore is classified within Level 3 of the valuation hierarchy and pricing information from third parties.
(4)
This reflects the amount of total gains (losses) for the period which are included in earnings, which are attributable to the change in unrealized gains (losses) relating to assets still held at the end of the period.


    

22

Table of Contents

The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of March 31, 2013 and December 31, 2012.
 
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
March 31, 2013
(Dollars in thousands)
  Assets
 
Mortgage securitization
$
87,356

Discounted cash flows
Discount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
Loss severity
7.2% - 10.8% (9.0%)
8.6% - 13.0% (10.8%)
4.1% - 6.1% (5.1%)
80.0% - 120.0% (100.0%)
Transferors' interest
$
6,872

Discounted cash flows
Discount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
4.6% - 6.9% (5.7%)
8.8% - 13.2% (11.0%)
11.4% - 17.2% (14.3%)
80.0% - 120.0% (100.0%)
Mortgage servicing rights
$
727,207

Discounted cash flows
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
5.1% - 7.7% (6.4%)
11.8% - 17.5% (14.7%)
59.3% -89.0% (74.1%)
Rate lock commitments
$
51,389

Mark-to-Market
Origination pull-through rate
63.0% - 94.5% (78.8%)
  Liabilities
 
 
 
 
DOJ litigation settlement
$
(19,100
)
Discounted cash flows
Asset growth rate
MSR growth rate
Return on assets (ROA) improvement
Peer group ROA
4.4% - 6.6% (5.5%)
0.9% - 1.4% (1.2%)
0.02% - 0.04% (0.03%)
0.5% - 0.8% (0.7%)
 
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
December 31, 2012
(Dollars in thousands)
  Assets
 
Mortgage securitization
$
91,117

Discounted cash flows
Discount rate
Prepay rate - 12 month historical average
CDR rate - 12 month historical average
Loss severity
7.2% - 10.8% (9.0%)
7.6% - 11.3% (9.4%)
5.3% - 8.0% (6.7%)
80.0% - 120.0% (100.0%)
Transferors' interest
$
7,103

Discounted cash flows
Discount rate
Prepay rate - 3 month historical average
Cumulative loss rate
Loss severity
4.6% - 6.9% (5.7%)
9.6% - 14.4% (12.0%)
11.4% - 17.2% (14.3%)
80.0% - 120.0% (100.0%)
Mortgage servicing rights
$
710,791

Discounted cash flows
Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan
4.9% - 7.4% (6.1%)
14.0% - 20.3% (17.3%)
58.6% - 87.9% (73.3%)
Rate lock commitments
$
86,200

Mark-to-Market
Origination pull-through rate
62.8% - 94.2% (78.5%)
  Liabilities
 
 
 
 
DOJ litigation settlement
$
(19,100
)
Discounted cash flows
Asset growth rate
MSR growth rate
Return on assets (ROA) improvement
Peer group ROA
4.4% - 6.6% (5.5%)
0.9% - 1.4% (1.2%)
0.02% - 0.04% (0.03%)
0.5% - 0.8% (0.7%)

The significant unobservable inputs used in the fair value measurement of the mortgage securitization (FSTAR 2006-1 securitization trust) are discount rates, prepayment rates and default rates. While loss severity (in the event of default) is an unobservable input, the sensitivity of the fair value to this input is zero because of the insurer coverage on the deal. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases in both prepay rates and default rates in isolation result in a higher fair value; however, generally a change in the assumption used for the probability of default is accompanied by a directionally opposite change in the assumption used for prepayment rates, which would offset a portion of the fair value change.

The significant unobservable inputs used in the fair value measurement of the transferors' interest are discount rates, prepayment rates, loss rates and loss severity. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases in both prepay rates and loss rates in isolation result in a lower fair value; however, generally a change in the assumption used for the loss rate is accompanied by a directionally opposite change in the assumption used for prepayment rates, which would offset a portion of the fair value change. Significant increases (decreases) in the loss severity rate in isolation would result in a significantly lower (higher) fair value measurement.

23

Table of Contents

The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all the assumptions in isolation would result in a significantly lower (higher) fair value measurement.

The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of the Company's actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fall out ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption utilized for the probability of default is accompanied by a directionally similar change in the assumption utilized for the loss severity and a directionally opposite change in assumption utilized for prepayment rates.

The significant unobservable inputs used in the fair value measurement of the DOJ litigation Settlement are future balance sheet and growth rate assumptions for overall asset growth, MSR growth, peer group return on assets, and return on assets improvement. The current assumptions are based on management's approved, strategic performance targets beyond the current strategic modeling horizon (2013). The Bank's target asset growth rate post 2013 is based off of growth in the balance sheet post TARP repayment. Significant increases (decreases) in the bank's growth rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the bank's MSR growth rate in isolation would result in a marginally lower (higher) fair value measurement. Significant increases (decreases) in the peer group's return on assets improvement in isolation would result in a marginally higher (lower) fair value measurement. Significant increases (decreases) in the bank's return on assets improvement in isolation would result in a marginally higher (lower) fair value measurement.
 
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below.
Assets Measured at Fair Value on a Non-recurring Basis
 
 
Level 3
 
 
 
March 31, 2013
 
 
Impaired loans held-for-investment (1)
 
 
Residential first mortgage loans
 
$
149,181

Commercial real estate loans
 
51,881

Repossessed assets (2)
 
114,356

Totals
 
$
315,418

December 31, 2012
 
 
Impaired loans held-for-investment (1)
 
 
Residential first mortgage loans
 
$
147,036

Commercial real estate loans
 
73,810

Repossessed assets (2)
 
120,732

Totals 
 
$
341,578

 
(1)
The Company recorded $(37.5) million and $(47.8) million in fair value losses on impaired loans (included in provision for loan losses on the Consolidated Statements of Operations) during the three months ended March 31, 2013 and 2012, respectively.
(2)
The Company recorded a loss of $(0.8) million and a loss of $(5.9) million related to write-downs of repossessed assets based on the estimated fair value of the specific assets, and recognized net gains of $4.4 million and a net loss of $(0.7) million on sales of repossessed assets (both write-downs and net gains/losses are included in asset resolution expense on the Consolidated Statements of Operations) during the three months ended March 31, 2013 and 2012, respectively.


24

Table of Contents

The following tables present the quantitative information about non-recurring Level 3 fair value financial instruments and the fair value measurements as of March 31, 2013 and December 31, 2012.
 
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
March 31, 2013
(Dollars in thousands)
Impaired loans held-for-investment
 
 
 
 
     Residential mortgage loans
$
149,181

Fair value of collateral
Loss severity discount
0% - 100% (45.7%)
     Commercial real estate loans
$
51,881

Fair value of collateral
Loss severity discount
0% - 100% (36.2%)
Repossessed assets
$
114,356

Fair value of collateral
Loss severity discount
0% - 100% (43.2%)
 
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average)
December 31, 2012
(Dollars in thousands)
Impaired loans held-for-investment
 
 
 
 
     Residential mortgage loans
$
147,036

Fair value of collateral
Loss severity discount
0% - 100% (46.6%)
     Commercial real estate loans
$
73,810

Fair value of collateral
Loss severity discount
0% - 100% (41.6%)
Repossessed assets
$
120,732

Fair value of collateral
Loss severity discount
0% - 100% (44.0%)

The Company has certain impaired residential and commercial real estate loans that are measured at fair value on a nonrecurring basis. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals or other third party price opinions are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.

Repossessed assets are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the repossessed asset. The fair value of repossessed assets, upon initial recognition, are estimated using Level 3 inputs based on customized discounting criteria. The significant unobservable inputs used in the Level 3 fair value measurements of the Company's impaired loans and repossessed assets included in the table above primarily relate to internal valuations or analysis.

Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all non-financial instruments are excluded from the scope of this guidance. Accordingly, the fair value disclosures required by this guidance are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of the fair value of the Company.


25

Table of Contents

The following table presents the carrying amount and estimated fair value of certain financial instruments. 
 
March 31, 2013
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Dollars in thousands)
Financial Instruments
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,230,686

 
$
2,230,686

 
$
2,230,686

 
$

 
$

Securities classified as trading
170,139

 
170,139

 
170,139

 

 

Securities classified as available-for-sale
169,827

 
169,827

 
71,489

 
10,982

 
87,356

Loans held-for-sale
2,677,239

 
2,677,259

 

 
2,677,259

 

Loans repurchased with government guarantees
1,604,906

 
1,507,767

 

 
1,507,767

 

Loans held-for-investment, net
4,453,266

 
4,364,213

 

 
18,393

 
4,345,820

Accrued interest receivable
81,056

 
81,056

 

 
81,056

 

Repossessed assets
114,356

 
114,356

 

 

 
114,356

FHLB stock
301,737

 
301,737

 
301,737

 

 

Mortgage servicing rights
727,207

 
727,207

 

 

 
727,207

Customer initiated derivative interest rate swaps
1,853

 
1,853

 

 
1,853

 

Liabilities
 
 
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
 
 
Demand deposits and savings accounts
(3,611,043
)
 
(3,533,087
)
 

 
(3,533,087
)
 

Certificates of deposit
(2,613,046
)
 
(2,631,999
)
 

 
(2,631,999
)
 

Government deposits
(774,891
)
 
(772,539
)
 

 
(772,539
)
 

Wholesale deposits
(74,465
)
 
(76,201
)
 

 
(76,201
)
 

Company controlled deposits
(773,846
)
 
(829,938
)
 

 
(829,938
)
 

FHLB advances
(2,900,000
)
 
(3,129,087
)
 
(3,129,087
)
 

 

Long-term debt
(247,435
)
 
(81,046
)
 

 
(81,046
)
 

Accrued interest payable
(15,402
)
 
(15,402
)
 

 
(15,402
)
 

Warrant liabilities
(7,847
)
 
(7,847
)
 

 
(7,847
)
 

DOJ litigation settlement
(19,100
)
 
(19,100
)
 

 

 
(19,100
)
Customer initiated derivative interest rate swaps
(1,853
)
 
(1,853
)
 

 
(1,853
)
 

Derivative Financial Instruments
 
 
 
 
 
 
 
 
 
Forward delivery contracts
(18,876
)
 
(18,876
)
 

 
(18,876
)
 

Commitments to extend credit
51,389

 
51,389

 

 

 
51,389

U.S. Treasury and agency futures/forwards
10,842

 
10,842

 
10,842

 

 



26

Table of Contents

 
 
December 31, 2012
 
 
 
Estimated Fair Value
 
Carrying
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Dollars in thousands)
Financial Instruments
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
952,793

 
$
952,793

 
$
952,793

 
$

 
$

Securities classified as trading
170,086

 
170,086

 
170,086

 

 

Securities classified as available-for-sale
184,445

 
184,445

 
79,717

 
13,611

 
91,117

Loans held-for-sale
3,939,720

 
3,945,133

 

 
3,945,133

 

Loans repurchased with government guarantees
1,841,342

 
1,704,317

 

 
1,704,317

 

Loans held-for-investment, net
5,133,101

 
5,119,704

 

 
20,219

 
5,099,485

Accrued interest receivable
91,992

 
91,992

 

 
91,992

 

Repossessed assets
120,732

 
120,732

 

 

 
120,732

FHLB stock
301,737

 
301,737

 
301,737

 

 

Mortgage servicing rights
710,791

 
710,791

 

 

 
710,791

Customer initiated derivative interest rate swaps
5,813

 
5,813

 

 
5,813

 

Liabilities
 
 
 
 
 
 
 
 
 
Retail deposits
 
 
 
 
 
 
 
 
 
Demand deposits and savings accounts
(3,192,006
)
 
(3,121,643
)
 

 
(3,121,643
)
 

Certificates of deposit
(3,175,481
)
 
(3,199,242
)
 

 
(3,199,242
)
 

Government accounts
(819,078
)
 
(816,258
)
 

 
(816,258
)
 

Wholesale deposits
(99,338
)
 
(101,729
)
 

 
(101,729
)
 

Company controlled deposits
(1,008,392
)
 
(1,005,780
)
 

 
(1,005,780
)
 

FHLB advances
(3,180,000
)
 
(3,422,567
)
 
(3,422,567
)
 

 

Long-term debt
(247,435
)
 
(78,220
)
 

 
(78,220
)
 

Accrued interest payable
(13,420
)
 
(13,420
)
 

 
(13,420
)
 

Warrant liabilities
(11,346
)
 
(11,346
)
 

 
(11,346
)
 

DOJ litigation settlement
(19,100
)
 
(19,100
)
 

 

 
(19,100
)
Customer initiated derivative interest rate swaps
(5,813
)
 
(5,813
)
 

 
(5,813
)
 

Derivative Financial Instruments
 
 
 
 
 
 
 
 
 
Forward delivery contracts
(14,021
)
 
(14,021
)
 

 
(14,021
)
 

Commitments to extend credit
86,200

 
86,200

 

 

 
86,200

U.S. Treasury and agency futures/forwards
5,821

 
5,821

 
5,821

 

 


The methods and assumptions used by the Company in estimating fair value of financial instruments that were not previously disclosed, are as follows:

Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.

Loans repurchased with government guarantees. The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

Loans held-for-investment. The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

FHLB stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is the fair value.

27

Table of Contents

Accrued interest receivable. The carrying amount is considered a reasonable estimate of fair value.

Deposit accounts. The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.

FHLB advances. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates the Company’s current borrowing rates for similar types of borrowing arrangements.

Accrued interest payable. The carrying amount is considered a reasonable estimate of fair value.

Fair Value Option

The Company has elected, under the fair value option in FASB ASC 825, "Financial Instruments," to record at fair value certain financial assets and financial liabilities. The fair value election is typically made on an instrument by instrument basis. The decision to measure a financial instrument at fair value cannot be revoked once the election is made. Upon adoption of Statement of Financial Accounting Standards 159, "The Fair Value Option for Financial Assets and Financial Liabilities," the Company elected the fair value option for loans held-for-sale originated post 2009.

The Company elected the fair value option to account for the liability representing the obligation to make Additional Payments under the DOJ Agreement. The signed settlement contract with the DOJ establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. The Company made the fair value election as of December 31, 2011, the date the Company first recognized the financial instrument in its financial statements.

The Company elected the fair value option for held-for-sale loans and the litigation settlement liability to better reflect the management of these financial instruments on a fair value basis. Interest income on loans held-for-sale is accrued on the principal outstanding primarily using the "simple-interest" method. Interest expense on the litigation settlement will be included in the overall change in fair value of the liability each quarter.

At March 31, 2013 and December 31, 2012, the loans held-for-sale that are carried at fair value were $2.5 billion and $2.9 billion, respectively. The change in fair value included in earnings was $87.6 million and $121.1 million for the three months ended March 31, 2013 and 2012, respectively. Changes in fair value of the loans held-for-sale are recorded in net gain on loan sales on the Company's Consolidated Statements of Operations.

At March 31, 2013 and December 31, 2012, the loans held-for-investment that are carried at fair value were $18.4 million and $20.2 million, respectively. The change in fair value included in earnings was $(0.8) million and $(1.1) million during the three months ended March 31, 2013 and 2012, respectively. Changes in fair value of the loans held-for-investment are reflected in interest income on loans on the Company's Consolidated Statements of Operations.

At both March 31, 2013 and December 31, 2012, the fair value of financial liabilities, which related to the DOJ Agreement was $19.1 million and was included in other liabilities in the Consolidated Statements of Financial Condition. The change in fair value of the DOJ Agreement liability for the three months ended March 31, 2013 and 2012 was zero and $0.8 million respectively, primarily due to the recognition of the periodic effect of discounting. The increase was recorded in legal and professional expense within non-interest expense on the Consolidated Statements of Operations.
    
    

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Table of Contents

The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding as of March 31, 2013 and December 31, 2012 for assets and liabilities for which the fair value option has been elected.
 
 
March 31, 2013
 
December 31, 2012
 
 
(Dollars in thousands)
 


Unpaid Principal Balance ("UPB")
Fair Value
Fair Value Over / (Under) UPB
Unpaid Principal Balance
Fair Value
Fair Value Over / (Under) UPB
Assets
 
 
 
 
 
 
 
Nonaccrual loans
 
 
 
 
 
 
 
Loans held-for-sale
$

$

$

 
$
222

$
240

$
18

    Loans held-for-investment
2,007

1,760

(247
)
 
2,021

2,064

43

                 Total loans
$
2,007

$
1,760

(247
)
 
$
2,243

$
2,304

$
61

    Other performing loans
 
 
 
 
 
 
 
    Loans held-for-sale
$
2,415,027

$
2,510,669

$
95,642

 
$
2,734,756

$
2,865,456

$
130,700

    Loans held-for-investment
16,671

16,633

(38
)
 
17,589

18,155

566

                 Total loans
$
2,431,698

$
2,527,302

$
95,604

 
$
2,752,345

$
2,883,611

$
131,266

    Total loans
 
 
 
 
 
 
 
    Loans held-for-sale
$
2,415,027

$
2,510,669

$
95,642

 
$
2